China’s carbon market is once again humming with the buzz of the China Certified Emission Reduction (CCER) system—a cornerstone of the country’s ambitions to control carbon emissions.
Much like stocks in a financial market, CCER projects are expected to be the driving force in carbon trading.
But as this market makes its return, the path forward is marked by both promise and peril.
New methodologies, old frustrations
On August 23, the National Center for Climate Change Strategy and International Cooperation (NCSC) made a long-awaited announcement: the CCER application channel was open for business. This move signaled the start of a new wave of projects ready to enter the carbon trading market. Yet, with this announcement came a set of new methodologies that have sparked more than just interest—they have stirred up a mix of hope and frustration.
Six methodologies now define which projects can qualify under the CCER system: afforestation carbon sinks, grid-connected solar thermal power generation, grid-connected offshore wind power generation, mangrove afforestation, low-concentration coal mine gas utilization, ventilation gas utilization, and energy-saving highway tunnel lighting systems. Each one acts as a rulebook, laying out the intricate steps from project design to the calculation of emission reductions. Without these guidelines, a project simply can’t be certified—and the industry knows it.
The release of these methodologies has been met with varied reactions. For some, they represent progress—a critical step toward reenergizing the carbon market. But for others, particularly those who had pinned their hopes on broader, more inclusive rules, the news has been a letdown. The methodologies, while essential, seem to fall short of the expansive vision that many in the industry were hoping for.
A market of uneven opportunities
The CCER market isn’t just heating up. It’s fragmenting. The demand for these carbon credits is primarily driven by companies under pressure to meet emission controls—chief among them, coal-fired power plants. These companies are the biggest players, seeking to offset their emissions and meet regulatory requirements through CCER. But within this market, not all projects are created equal.
Large state-owned enterprises (SOEs), the so-called “big five, small six” in China, dominate in areas like grid-connected solar thermal and offshore wind power projects. These renewable energy initiatives require hefty investments, leaving private companies on the sidelines. On the flip side, private enterprises are finding more opportunities in afforestation carbon sinks and low-concentration coal mine gas projects. Yet, even here, the road is anything but smooth, with significant challenges and high stakes involved.
Despite the allure of CCER projects as a business, industry professionals are treading carefully. Investment returns are far from guaranteed, and the market is riddled with risks and uncertainties. The opportunities are there, but they are not evenly distributed, creating a market landscape that’s as fragmented as it is promising.
The high risks of CCER investment
Zhou Hai, senior vice president at sustainability solution provider MioTech, has seen this market from the inside, and he’s not quick to jump on the bandwagon. While the latest methodologies have rekindled interest in CCER, Zhou is quick to caution against overconfidence. The risks in this market are substantial—before the relaunch, only about 30% of projects got the green light. For every success, there are many more failures, and even a well-assembled team can’t eliminate the inherent uncertainties.
Financial returns from CCER projects are far from a sure thing. Many of these ventures, especially in renewable energy, are heavily reliant on policy-driven carbon prices. While there’s optimism about long-term price increases, short-term volatility can wreak havoc on project profitability. For investors, diversification is key—CCER projects should be just one of several revenue streams to hedge against the risk of project failure. This approach is especially crucial in projects like low-concentration coal mine gas, where additional revenue might come from heating, power generation, or even local government subsidies.
But the challenges don’t stop at financial risks. Operational costs are a persistent thorn in the side of these projects, often eroding profitability. Finding reliable operators who can execute projects according to plan is critical, yet difficult. Moreover, the complex web of revenue-sharing agreements with project owners, coupled with the need to engage external carbon asset development firms, further complicates the financial landscape.
Voices from the inside
The recent CCER relaunch has sparked a range of reactions from industry veterans. In an interview with 36Kr, one practitioner from a carbon asset management firm described the atmosphere as mixed—there’s hope, but also a fair share of frustration. The new methodologies, while a step forward, didn’t quite hit the mark for everyone. For example, the inclusion of energy-saving highway tunnel lighting systems surprised many, given its relatively small impact on emission reductions.
Zhao Jing, a partner at Cathay Capital, shares this tempered outlook. Cathay Capital has been scouting investment opportunities in the carbon neutrality space since 2020, with a focus on carbon accounting services and digital carbon asset development. Zhao told 36Kr he believes that, while the CCER market holds substantial promise, its future hinges on regulatory policies and the creation of more comprehensive methodologies.
Zhao is particularly intrigued by the potential of digital technologies like blockchain and artificial intelligence to enhance the credibility and security of carbon assets. These tools could be pivotal in addressing the core challenges facing CCER, such as ensuring transparency, accuracy, and sustainability throughout the carbon reduction process.
The road ahead for CCER
As the CCER market moves forward, cautious optimism prevails. The new methodologies, though limited in scope, are seen as necessary first steps in testing the waters and gradually building market momentum. But there’s a strong desire within the industry for the next wave of methodologies to be more inclusive and innovative, covering a broader range of projects and scales.
With China’s dual carbon goals looming large on the horizon, there’s hope that the CCER market will expand and mature, offering more systematic and substantial investment opportunities. For now, though, the industry remains in a state of anticipation, with many waiting for the market to broaden and for new methodologies to unlock greater potential.